Thursday, July 31, 2014

Two days ago, Amazon released a statement explaining their position in the negotiation difficulties with Hachette. As many of us had guessed, it's all about ebook pricing.

Barry Eisler did a post about the statement, and I fisked Douglas Preston, history's worst poster child for publishing, because he continues to beat a drum that only 1% of authors can hear.The fact that Preston acknowledges that many disagree with his position, but never responds to or addresses criticism, is equivalent to stuffing his face from a big bowl of fail with a spoon in each hand.But elsewhere on the Internets, there are those who remain on Hachette's side and are vocal in their concerns about the Amazon statement. Among them, John Scalzi, Mike Shatzkin, and Michael Cader of Publishers Lunch.

Joe: Mike, when Amazon has the data on what pricing structure is the most lucrative, that's not opinion. It’s math.

Mike: Publishers pay money for the right to exploit copyrights and their “opinion” on pricing should be at least as important as anybody else’s.

Joe: A publishers' opinion on pricing certainly applies to the wholesale price at which they sell their content to retailers. They've always controlled that. Publishers also insist on a recommended list price (books are one of the very few retail items that have the price printed on them). But unless the contract with the retailer states otherwise, that's where their opinion ends.

Mike: Agency publishers had a lot of experience with higher ebook prices that couldn’t be discounted before the DoJ stepped in and they apparently disagree.

Joe: Huh? Ebooks were being discounted, which is why publishers colluded to force the agency model on Amazon. The agency deal meant Amazon couldn't discount. When the DOJ stepped in, Amazon went back to discounting.Okay, upon rereading your sentence, I think you're saying that the price- fixing publishers seemed to like higher prices.Did they like them because they made more money? Probably not, because they had to give a lot of that money back to readers in the settlement.Or did they like those high prices because they retarded the growth of ebooks and protected their paper oligopoly? How is that counter to Amazon stating that $14.99 is unjustifiably high? It seems to be sympatico. The price fixers wanted those ebooks to be priced high, and their justification was to protect paper. Mike: This elasticity measurement considers only sales of ebooks at Amazon. What is the impact on print book sales when the ebook price goes up and ebook sales go down?

Joe: It only considers ebooks because ebooks are the items that Hachette wants to raise prices on. Hachette and other publishers make higher profits on ebooks, but they don't run a cartel over ebook distribution like they do with paper.

Mike: What is the impact on the bookstore distribution network when ebook prices go up and ebook sales go down? It would be commercially irresponsible of publishers not to consider those effects as well.

Joe: What's commercially irresponsible is not giving readers what they want. In the past, publishers had all the control. They priced hardcover books as luxury items, and those who couldn't afford them either had to wait for the library copy or wait a year for the less-expensive paper version to come out.Publishers no longer wield that power. It's understandable that they don't want to let it go, but you can't put that cat back in the bag.Amazon's press release isn't meant to be a comment on the state of the paper publishing industry. It's meant to explain the current negotiation situation with Hachette, which is about ebook pricing.

Mike: It is true that ebooks live in a world where they compete with other media. It is also true that the they live in a world which includes print, also an important component of a publisher’s and an author’s economic world. This analysis is very short on measurements of the impact on print sales of lower ebook prices.

Joe: Print is important to my economic world. It's about 2% of my income.

Ebooks are 1% of Legandare's income. And, again, this pricing issue is about ebooks, not paper.

We know Hachette wants to protect their paper sales. Why should Amazon care about that? Amazon cares about the needs of its customers, and Amazon and Hachette can apparently agree on terms for selling paper books. How does your argument that Amazon isn't taking paper sales into account affect Amazon at all? That isn't Amazon's concern.

Mike: It is good to hear that Amazon accepts a 30% share for retailers as reasonable. Will they now extend terms reflecting that to all the non Big-Five publishers who are trapped in “hybrid” terms, giving 50% or more in wholesale discounts to Amazon for ebooks? Of all the points raised by Amazon in this document, this is the most consequential in terms of commercial impact.

Joe: You mean "trapped" as in "willfully entered into the contract"? I'd be fine with a 50% wholesale deal with Amazon. I'd love it if they heavily discounted my books. I'd love it even more if they sold them as a loss-lead. But I don't have a paper empire to protect.

Mike: How about the academic and professional title universe that never operated on trade discounts until Amazon forced them into the trade discount world recently?

Joe: I don't think you understand the word "forced" anymore than you understand "trapped".

I'll give you a correct usage: "Amazon was forced to accept the agency model because publishers illegally colluded, and they became trapped by those terms."

No one is forcing any publisher to accept Amazon's terms. Amazon isn't a monopoly. Those publishers are free to go elsewhere. Amazon isn't breaking any laws by being a fierce competitor and negotiator. The same cannot be said about Hachette.

Mike: The economics of those segments of the book industry are being devastated by trying to put them into the trade paradigm where they never belonged and never intended to be.

Joe: Yes, the world will weep over the loss of $200 textbooks. I'm getting teary-eyed just thinking of it.

Again, it is not Amazon's job to give life-support to a business model that no longer works, whether it’s 8-track tapes or textbooks.

Technology, and consumers, have moved on. Publishers also need to move on if they want to continue to be relevant. Go with the flow, or drown.Michael Cader of Publisher's Lunch was also critical of Amazon's statement, and he says some things worth responding to.

Cader: As most of our readership has likely seen by now, on Tuesday afternoon the Amazon Books team put up another unsigned, closed to comment post (an exercise in what Barry Eisler ought to call shameful "pointless, pernicious, promiscuous anonymity") on the Kindle Forum. The post is said to offer "specific information about Amazon's objectives" in their negotiations with Hachette Book Group.

As to why Amazon doesn't allow comments, I'm puzzled by that, as well. They haven't allowed comments on any of their Hachette related posts. I doubt it would be because they fear criticism--Amazon tends to ignore criticism, even from the highest sources.If I were forced to speculate, I'd guess--and this is a pure guess--that Amazon believes the comment thread would fill up with anti-Hachette sentiments, and that's not conducive to the negotiations they are currently involved in.Or maybe Amazon truly fears that a pro-Hachette avalanche of posts would overwhelm them, as pro-Hachette authors have been lighting the Internets on fire with their fact-based, common sense posts.(Can anyone point me to a single pro-Hachette fact-based common sense post? Anyone?)

Cader: If you have not read the post yet, check it out. It raises many questions, among them:

Amazon is very careful with their words, even if not elegant. The post begins, "A key objective is lower e-book prices." A lot of traditional media have written the post up as if it said "The key objective..." What are the other key objectives, Amazon? Why do your conversations with people in the trade talk about looking for your fare share of the "business efficiencies" produced by a rising ebook market and your investments, while your public words are only about pricing objectives?Joe: Well, we agree that Amazon is careful with their words. It’s unusual to hear an observation like that leveled as a criticism. Does Cader prefer the Hachette approach, which is to clear English what a chainsaw is to a tree…?That said, I'm pretty sure Amazon just agreed to a 30% cut of ebooks--that speaks directly to their business efficiencies of the rising ebook market, doesn't it? So they didn't just speak of pricing objectives. But since Hachette hasn't made any statements about pricing, we're left with the belief that this dispute is about ebook pricing, which is why Amazon is addressing that particular point.Cader: Amazon says they have "quantified the price elasticity of e-books from repeated measurements across many titles" in their store. Will they provide that data to publishers? Will they do it for a variety of price points?

Joe: Have publishers released any price-point or sales data? No. We rely on third parties to attain that information, such as BookScan.

I find it interesting that Amazon is, finally, sharing some price point data, and Cader immediately wants more from Amazon and nothing from Hachette. It reminds me of that Louis CK joke about WiFi on airlines.

Amazon, like legacy publishing, has always been tight-lipped about sales figures. But with Amazon, authors get timely, easy to understand royalty statements.

Cader: Amazon keeps trying to push a public perception that most new ebooks are $14.99, overlooking the substantial number of titles at $11.99 and $12.99 -- and overlooking the post-settlement discounting provisions that led some publishers to raise ebook prices in anticipation of Amazon's discounting.

Joe: I had the impression that Amazon is focusing on $14.99 because that's the price Hachette is pushing for. Remember that the agency model is still in effect on Amazon, all the DOJ did was allow Amazon to discount those agency prices.As for publishers raising ebook prices in anticipation of Amazon's discounting, I find it hilarious that there were abundant author complaints that Amazon stopped discounting Hachette titles. How about Hachette prices them fairly to begin with, in which case discounting wouldn't be needed?

Cader: And will they back up the contention that lower prices raises overall revenue in the form of advance guarantees, one publisher asks? Amazon is essentially offering an assurance that an ebook that sells 100,000 units at $14.99 will sell 174,000 units. Even if true, does that only work in isolation? E.g., if all $14.99 ebooks moved to $9.99, would the sales effect be mitigated as consumers are back to choosing among a wide swath of comparably priced books?

Joe: Well, we could always run a controlled experiment by using a parallel universe...

Oh, wait. We can't.

But we can allow Amazon to price ebooks where they choose, and publishers to wholesale those ebooks to Amazon for the price they choose. Which is how it used to be, except publishers hated the discounting so much that five of them colluded with Apple to fix prices.

Cader: Their figures consider a world of ebooks only. Their "total pie" is really just a piece of the pie. But publishers and authors are looking to maximize revenue across all formats. "Total revenue" on an ebook is only part of the "total revenue" for a new release book, and the hardcover edition still generates substantially more revenue per unit.

Joe: As I mentioned while responding to Shatzkin, this dispute is about ebook prices. Hachette is welcome to counter with a "total pie" argument, but Bezos believes "your margin is my opportunity". He's not in business to prop up the paper book market.

Cader: Publishers and authors are also looking to maximize exposure of their titles and revenue across all possible outlets. More viable outlets makings books available for perusal and sale is an essential part of the "healthy reading culture" Amazon talks about.

Joe: So it's Amazon's job to bolster its competition? It's one thing making books competitively priced with other media types. It's another thing to be competitive with other retailers selling books. Amazon wants low prices. It’s in Amazon's best interest if other retailers price books higher, or don't sell books at all. That's a no-brainer. Amazon's arrival on the publishing scene has given the industry a much needed shot in the arm. Writers, and readers, are benefitting. Amazon's position seems to be it wants those benefits to continue, but it isn't Amazon's job to enable the competition to compete better.

Cader: Of course it's in Amazon's interest to drive higher ebook sales -- where they have a 60 to 70 percent market share -- over print sales, where their market share is half of that or less, but it doesn't mean that is the solution for publishers and authors, or even readers.

Joe: As I stated above, my paper income is about 2% of my overall income. But publishers still have an oligopoly over the paper industry, and they want to protect that. This isn't an impasse. Readers will vote with their wallets. Because, for the first time ever, readers have a choice.

Cader: Tangentially, first-run movies would sell a lot of downloads on Amazon at most any price. The lower the price, the more downloads they would sell. Would that be good for the movie business as a whole?

Joe: Funny you should mention that -- because more and more pay-per-view movies are being released while the film is still in theaters, or in some cases before it is in theaters.

Cader: People in the business will smile at Amazon's writing, "Any author who’s trying to get on one of the national bestseller lists should insist to their publisher that their e-book be priced at $9.99 or lower." As we've demonstrated, it's harder than ever to get a regular new release ebook onto to Amazon's Kindle bestseller list, which now gives 40 percent to 50 percent of its slots to books Kindle Unlimited free trial members have clicked to download.

Joe: Uh, then maybe those publishers should enroll their books in Kindle Unlimited?

I just hit #11 on the Amazon Top 100 with Whiskey Sour, which was published back in 2004. I sold over 6000 ebooks in a week. I can get a ten-year-old book on the list with just a few ads, but giant publishers can't hit the Top 100?

But this is a straw man. Amazon is talking about lists like the NYT, which publishers deem to be extremely important (I've sold a few million books and never hit the NYT list). And if publishers want to get on the NYT or USA Today lists, Amazon is helpfully suggesting an ebook priced at $9.99 or less, because Amazon has data to show this is the best price point.It just isn't a price point that publishers like, because they care more about losing power and therefore relevance (that paper oligopoly) than they do about losing sales.

Cader: We understand Amazon is playing to the crowd, where the idea has been embedded that agency pricing raised prices.

Joe: How could that idea have been embedded? Maybe because, under the agency model, prices went up? Isn't that what the DOJ proved? Why does Cader think five of the then Big Six colluded to fix prices? Were they trying to force Amazon to lower its prices?

Cader: But they way they phrase it in the post -- "the 30% share of total revenue is what Hachette forced us to take in 2010 when they illegally colluded with their competitors to raise e-book prices. We had no problem with the 30% -- we did have a big problem with the price increases" -- is factually wrong. eBook prices paid by consumers may indeed have risen post agency, but the agency publishers themselves did not increase prices. They lowered their prices to their retailers, and they eliminated discounting.

Joe: Huh?

Ebook prices paid by consumers went up. The publishers controlled those prices. And publishers and authors made less money. But this is all apparently okay as long as Amazon could no longer do any discounting?

Amazon has no problem with 30%, because that's what they take from indies. They did have a problem with higher ebook prices.In the short run, Amazon made more money per ebook sale when the publishers forced the agency model on them, and they still had a problem with it because it meant higher ebook prices overall, which they didn't want.

Cader: "We had no problem with the 30%" is raising lots of questions from other players. Many publishers would love to limit Amazon's share to 30 percent.

Joe: And I'd love to sell my ebooks to Amazon at a 50% wholesale that they're free to discount. It all comes down to what sort of deal you're able to make with Amazon.

Cader: Smashwords founder Mark Coker wonders in our comments why that offer doesn't apply to the hundreds of thousands of Smashwords titles? "So agency is okay as long as it's accompanied by lower prices? Then why have they refused to allow Smashwords or other low-cost ebook distributors into their agency program?

Joe: I'll take a wild shot here: because Smashwords is a competitor?

Cader: We'll give them 30% *and* give their customers lower prices. If Amazon wants its customers to have lower prices, then why the doublespeak? And why then has Amazon been so stingy with free pricing?"

Joe: It's a mystery to me why Amazon doesn't see the value of free. They're leaving a lot of potential money on the table. But Amazon, like any company, is free to do business with whom it chooses, and how it chooses.

Cader: On Amazon's remarks about authors' interests and their share of ebook revenues, Coker adds: "Nice of Amazon to care about authors. But do they really care? If they care about the welfare of authors, then why for last four years has Amazon been robbing KDP authors every day via draconian price matching? Amazon routinely steals revenue from authors even when the price differentials are due to a competing retailer's error, and not the author's intention or fault."

Joe: I don't like KDP Select's exclusivity either. I also think Amazon should sell in epub format. I'd like to be able to make my books free whenever I want to. I've been telling Amazon this for years. But it's their house, their rules. If I don't like the rules, I can opt out of Select, or take my books off Amazon completely.

I don't expect Amazon to become altruistic, but since the days of DTP they have been operating according to a philosophy of enlightened self-interest. I have benefitted. So have tens of thousands of other authors. So have many millions of readers.

Publishers are correct to fear Amazon. Amazon is slowly disintermediating them. That's what this dispute is about. That's why Hachette wants $14.99 ebooks. Because as the ebook market grows, and the paper market shrinks, what’s the point of having a publisher? Most authors with even a pair of functioning neurons will cut out the middleman and take that share for themselves. Publishers are middlemen. Once they were essential middlemen. Now they are, as Barry Eisler says, a value-added option. If you find value in turning over ¾ of your ebook royalties in return for cover art and editing. Because when B&N closes, and paper distribution exists only for the big names like Patterson, Preston, and Turow, cover art and editing will be all the legacy industry can offer authors. And the legacy industry knows how lame that is.